70% of DB schemes would fail TPR fast track requirements - Hymans Robertson

Nearly three quarters (70 per cent) of defined benefit (DB) pension schemes would fail to meet The Pension Regulator’s (TPR's) fast track requirements, according to analysis from Hymans Robertson.

Research by the consultancy found that just 30 per cent of schemes would pass all four of the proposed fast track tests on long-term objective, technical provisions, recovery plan and investment risk.

The firm highlighted that the findings are “almost exactly in line” with the results of a previous webinar poll of DB trustees, which showed that just 35 per cent felt they were on track to achieve fast track.

It also warned that, following the pandemic, it is likely that the regulator’s parameters for the new DB funding code will need to be more flexible in order to allow fast track to remain achievable for most schemes.

Commenting on the paper, a spokesperson for TPR stated: “As the pensions industry is aware, our 2020 consultation focused on high level principles and set out options for how they could be applied in practice.

"We have not yet set fast track guidelines – these will be developed taking into account responses to our first consultation, legislative developments, an impact assessment and prevailing market conditions and will be consulted on in 2021.

"It is therefore far too early to make a credible prediction on how many schemes will look to take the fast track route or the bespoke one. It is also important to remember that the bespoke route is equally valid as fast track.”

Hymans Robertson associate investment consultant, Stephen Jasinski, noted that whilst schemes are "clearly" beginning to consider the impact of TPR’s Code of Practice, the final parameterisation of the framework is still ongoing.

He stated: “This will very much hinge on where these parameters are nailed down and, in particular, how they differentiate between different covenants.

"Two-thirds of schemes that passed the tests have a sponsor with a strong covenant rating. This suggests that fast track will be a higher barrier to clear for those with weaker covenants.

“Similarly, where schemes failed the tests, the most common reason for this across all covenant grades was that their recovery plans were too long.

"In some cases, this will be because the deficit has increased since the recovery plan was set – notably in the context of the turmoil caused by Covid-19 – or because the recovery plan can no longer allow for additional asset outperformance."

Jasinski also clarified that for schemes close to meeting requirements, it could be relatively straightforward to do a "bit of repackaging" to be able to pursue a fast track route.

He continued: “That repackaging will be harder for schemes doing something quite different or where the gap is large. To pass all four tests and comply with fast track, cash requirements may have to increase for sponsors in the short to medium term.

“In the current environment where sponsor affordability is already constrained, this prospect will loom particularly large.”

Jasinski emphasised that pinning down the parameters in a post-Covid pension landscape is likely to affect how many schemes will opt to pursue a fast track route.

In particular, he noted that, in light of developments since the consultation, it is likely parameters will need to be set at the more flexible end to remain an "achievable target" for most pension schemes.

He clarified that whilst the regulator does not have any specific targets for the number of schemes that will follow a certain approach, it is "certainly" trying to set fast track at a level that is appealing to a number of schemes as a "more prescriptive route to compliance".

Industry experts have previously called for greater flexibility in the code, with some emphasising the need to avoid a fast track default, and others calling for a third option to be included alongside the fast track and bespoke routes.

Furthermore, analysis from Lane Clark and peacock has previously warned that sponsoring employers of large DB schemes could face £100bn bill under the new funding regime.

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